Black economic empowerment

BLACK ECONOMIC empowerment (BEE) is clearly at the crossroads. The report by the commission under Cyril Ramaphosa on the way forward that President Mbeki had requested by mid-January is late, though expected imminently. The crisis of BEE is evident from a whole series of events.

• Nafcoc (the National African Federated Chamber of Commerce and Industry), the flagship of black business for 36 years, is in a state of disarray and may be on the verge of collapse. Its president, Steven Skhosana, was ousted in January because, he says, he failed to gain the support of his executive in an anti-corruption drive at Nafcoc, after he called in the police to investigate what he called the "looting" of the organisation. The result was a burglary in which five computers and a great deal of vital information was stolen. Nafcoc also owes R1.8m to the taxman, including R1m in PAYE debts going back to 1995. Its January council meeting degenerated into a shambles as some delegations were refused entry and others withdrew. Disgruntled insiders say its staff and leadership now outnumber the organisation’s membership. African Star, the independent black airline that was to have launched this year, has collapsed. The airline was unable even to pay its staff or the department of civil aviation to cover the costs of certification of the two Boeings it was to buy. Its cheque for R60,000 bounced and its chief executive, Joseph Kirama, became unavailable for comment.

• Three of the privatisations thus far brokered by government have seen state assets handed over to black empowerment companies. Of these SunAir and Aventura have collapsed while the third, Alexcor, is on the verge of collapse.

• The flagship of BEE since 1994 was undoubtedly Nail (New Africa Investments Ltd). The company virtually fell apart last year after a disgraceful attempt at self-enrichment by the directors led to a shareholders’ revolt and the resignation of Dr Nthato Motlana and Jonty Sandler and the unbundling of the company. Black ownership of the restructured Nail is down to only 10 per cent and the company is a shadow of its former self.

The two white businessmen most associated with black empowerment are Jonty Sandler of Nail and Brett Kebble at JCI. Sandler was Nail’s sole white face alongside Motlana, Dikgang Moseneke and Zwelakhe Sisulu but was believed by many to have been the moving force behind the scheme for the directors’ enrichment. Kebble played a leading role in JCI’s black empowerment phase under Mzi Khumalo. When this ended in complete disaster amid rows over corporate misgovernance and the virtual dismemberment of the mining house, Kebble picked up JCI assets cheaply and emerged as the main winner from the imbroglio. Both men have now been disgraced. Sandler, in addition to being forced out of Nail, is now facing charges of indecent assault while Kebble has been forced to resign from a host of corporate positions over charges ranging from alleged insider trading to the granting of improper loans.

Governmental procurement policies favouring BEE bidders have frequently led to white firms appointing token blacks who are used simply as window-dressing to obtain contracts. In one classic case the BEE company, Maru a Pula, run by one of the country’s most prominent black businessmen, Gaby Magomola, won a major contract from the Independent Electoral Commission for polling station banners — although Maru a Pula’s bid was considerably higher than some of its competitors. Having won, Maru a Pula subcontracted the work to four of its losing competitors and pocketed the money simply for lending its name to the operation.

The IEC was, however, following government rules allowing bids from previously disadvantaged individuals (PDIs) to be up to 10 per cent higher than others. Eric Kuhl, the director of the Printing Industries Federation, pointed out that many of the R100m worth of printing contracts offered by the IEC had gone to PDI-led firms. They had "no capability or expertise to do the job and they have to go back to white firms to get the job done. It seems as if there is hardly a straight transaction that takes place in these circles." In effect the PDI/10 per cent rule constitutes a special tax on all taxpayers with the proceeds handed to black businessmen who are on good terms with the government.

Apart from the high-profile collapse of such black empowerment businesses as Nail, JCI, Pepsi, African Bank, Community Bank and New Sorghum Breweries, other voices claim that the sole achievement of BEE to date has been the enrichment of a small number of individuals and that there has been no general diffusion of economic power within the black community.

In fact the notion that BEE would lead to a diffusion of economic power within the black community, though widely believed, was always unrealistic. Thus Nafcoc’s Skhosana: "We desperately need a black capitalist class to ensure that people benefit out of the wealth of this country, unlike the white capitalist class that misused its muscles to the detriment of the country and its people. The sooner we get real empowerment the stronger the poverty-fighting force will be."

The idea that a black business class is likely to differ from a white or Asian business class in such respects simply reflects a failure to understand capitalism. It is difficult to believe that Skhosana does not know this perfectly well. The problem is that the new black bourgeoisie, anxious to avoid the negative connotations attaching to white capitalism, has attempted to sell itself to the rest of the black community on a false prospectus. It is only to be expected that this will produce disappointed hopes down the line.

An equally obvious error is that many blacks who go into business are already members of either a political or educated elite. Many of the most prominent businessmen are clearly political figures and, because of the centrality of government contracts and preferment, all such business people are careful to keep their links with the ANC well oiled. The ANC likes to call them "the patriotic bourgeoisie" which is ANC-speak for "they are on our side". In fact the new black middle class is very largely an ANC patronage phenomenon and will not really function as a proper business class until it escapes this clientelism. Its members tend to assume that they should start at the top with a seat on a board of directors, generous emoluments and a large car — and thanks to implicit government backing, many do.

In practice, whatever the government does, it is never enough for its clients. Thus during the hearings in January on the Preferential Procurement Policy Bill its suggested allocation of 90 points out of 100 for the lowest price tendered and only 10 points for empowerment was strongly criticised by black business figures. Attorney Christine Qunta, representing three groups of black professionals, called it "laughable" and said that instead of advancing the previously disadvantaged, the bill would entrench the position of white men who controlled the economy.

Black businessmen have been roundly criticised both by Mbeki and finance minister Trevor Manuel for "not adding value" and for acting as mere rentier capitalists, holding shares in white companies that do the actual work — or as token black faces in tender bids. Dikgang Moseneke has pointed out that many black businessman concentrated on owing shares and becoming directors, usually implying a hands-off approach to the actual operational management of an enterprise. Yet it was precisely in the sphere of operational management that all real influence lay and all real skills were learned and developed. Bheki Sibiya, executive director of Transnet, says that "black empowerment initiatives will never succeed unless African communities receive proper business training."

Under the prevailing climate many would-be black businessmen have developed a curious idea of what "going into business" means. Rather than becoming an employee of a large corporation or setting up one’s own enterprise, for many of the black bourgeoisie it means laying siege to an already established white business and demanding to be taken on as a senior partner or director with a share of the equity. BEE groups which have approached South Africa’s dynamic hi-tech companies such as Dimension Data, Comparex, Datatec and Thawte complain angrily that these IT firms "are unwilling to relinquish control of the business" — as if this was a reasonable expectation. Shaun Ral, head of the Cape Empowerment Trust, says that South Africa needs a black-owned IT company able to take such companies on and makes threatening noises about them forfeiting government business unless they allow themselves to be taken over. "We will not take less than a 51 per cent stake in a company," says Ral, who hopes to build the CET into R500m IT business within two years. He speaks darkly of difficulties in raising the capital required to realise his ambitions because of "negative perceptions about BEE" among lending institutions.

Curiously absent from this rhetoric is any recognition that the IT firms in question have been built up from nothing at lightning speed by a combination of technical ingenuity and entrepreneurial flair. Since 90 per cent of the business such firms do is outside South Africa they are unlikely to be bludgeoned by threats of losing parts of the parochial South African market. If placed under undue pressure such companies could relocate abroad at the drop of a hat.

These contradictions are unlikely to be allayed by further government measures for preferential procurement policies or by such monstrosities as the National Empowerment Fund. The latter will be allocated shares from privatised parastatals which it can then sell on at a 20 per cent discount to previously disadvantaged investors, some at least of whom are likely to be anything but poor. The chances are they will quickly sell their shares into the market and pocket a 20 per cent profit. It would be far simpler for the state to decree lower rates of tax for the previously disadvantaged and this would also spread benefits among a wider, though still largely middle class, group.

Part of the problem is that Mbeki has made himself the promoter and protector-in-chief of the new black bourgeoisie. He now wishes to move the economy in a more pro-market direction, which is bound to infuriate Cosatu and the SACP and thus will lean hard on the support of the new black bourgeoisie.

Yet such objectives are not easily compatible. There is no evidence at present that BEE firms would win a genuine free market competition. Their handicap lies not just in the apartheid wickedness of job reservation and policies designed to make life difficult for black entrepreneurs; it lies in the apartheid education system. Black business is unlikely to prosper in the modern economy until it can draw on a wide pool of well-trained black accountants, lawyers, engineers, managers and computer scientists. Already a new generation of young black professionals has begun to emerge, many of them able to take on white competition and win without the help of preferential or affirmative advantages. The future of black economic empowerment is far better gauged by measuring the size, success and growth of this group than by calculations about what percentage of equity on the JSE is in black hands.

The majority of these young black professionals work in companies which are still dominated by whites at the top level but which, with their ineluctable rise, will become increasingly multiracial. That is to say, it will be harder and harder to divide the JSE into white and black companies. It is this objective of a fully multiracial skilled business class which the government should be pursuing rather than the promotion of a racially defined segment of business which has more than its fair share of problems. Rather than seek quick fixes that are bound to end in scandal, failure and purely individual enrichment, the government should devote its resources to widening and strengthening the pool of young black professionals.